Student Loans | October 3, 2022 | Lisa Litant
10 Terms to Know to Choose the Best Student Loan
What you'll learn
- Why it’s important to understand loan-related words
- The definitions of APR, COA, and interest
- What a repayment option is and why you need to choose the right one for you
When you’re ready for a new phone or laptop, you research their features so you can compare them. It’s the same when you’re planning to get a student loan. Understanding the words and terms you’ll be reading about can help you compare—and choose—the best student loan for you.
The most important word to understand: Loan
1. Before you start looking, you need to know what a student loan is: it’s money you borrow—and have to pay back. For both federal and private student loans, this is a legal obligation. You’re responsible for repaying the amount you borrow, plus interest.footnote 1 Learn more about federal vs private student loans
Other important student loan terms
2. APR: An Annual Percentage Rate (APR) tells you what the loan’s interest rate will be for a whole year, along with any additional costs or fees. It's the total cost of having the loan, given as a percentage. Knowing APRs can give you an apples-to-apples way to compare the costs of different loans.footnote 2
3. Cosigner: Most students don’t have the credit history to take out a loan by themselves. That’s why most private student loans require a cosigner—an adult (often a parent) with good credit who shares responsibility for the loan with the borrower. Having a cosigner’s better credit on your student loan application may improve your chance of approval and help get you a lower interest rate.
4. Cost of attendance (COA): This is an estimate of what you can expect to pay for one year of school. It includes expenses like tuition, fees, books, meals, transportation, and even personal expenses. A school’s cost of attendance is generally included in your financial aid offer, or you can call the financial aid office for it.footnote 3 Note: You generally can’t take out a private student loan for more than the cost of attendance.
5. Federal student loans: These loans are offered by the government and you have to submit the FAFSA® to see if you’re eligible. You should consider federal student loans before you choose a private loan since they may offer more flexible repayment options.
6. Interest: Interest is the amount you’re charged for borrowing money. Interest on your student loan begins to accrue (grow) the first day your funds are disbursed (sent) to your school.
7. Interest rate: This is the percentage of interest you agree to pay to borrow money. It’s calculated on the unpaid principal (the amount that you borrowed and any unpaid interest that has capitalized). Student loan interest accrues (grows) every day. Some student loans offer two types of interest rates: variable and fixed.
- A fixed interest rate stays the same for the life of your loan. The rate you receive when you first get the loan will not change until the loan’s paid off. You’ll have a predictable monthly payment.
- A variable interest rate means the rate can go up or down if there are changes to the loan’s index—a standard that lenders use to base your loan’s interest rate on that reflects market conditions. For instance, if interest rates are going up, the index’s rate will increase—and so will your loan’s interest rate. That’s why your variable rate loan’s monthly payment amount may change as interest rates rise or fall.
8. Principal: The amount you borrow from a lender, plus any unpaid interest that’s been capitalized (added to the principal).
9. Private student loans: These are offered by banks and financial institutions to help you pay for college. They’re “credit-based,” which means the lender will evaluate how good your credit (and your cosigner’s credit) is, along with other financial information from your application.
10. Repayment options: Many student loans offer multiple repayment options—that’s how you’ll pay it back. Federal loans don’t have in-school repayments—payments start after you leave school. That’s when you may be able to choose from one of several options. Private student loans generally offer both in-school and deferred (after-school) repayment plans; the one you choose when you apply for the loan generally can’t be changed.
Understanding the words used with student loans—both federal and private loans—can help you understand how they work, make it easier to compare different loan options, and help you make better financial choices, now and after graduation.